Sentiment over green investment blows hot and cold

Renewable energies made a cameo appearance in the debate about the possible secession of Scotland from Britain as John Swinney, the finance minister for Scotland, tried to convince Russian companies to buy stakes in clean energy projects in the country.

Rodrigo Amaral

The idea of attracting investments to a new sector with growth potential makes sense for any country. It is especially the case for a country that seeks to become independent and has plenty of natural resources to offer. But are renewable energies a good place for investors to achieve returns?

It looks promising. The need to find alternatives to fossil fuels are accepted by almost every government in the world.

In Europe, countries need to meet strict deadlines to make sure that 21% of the electricity produced in the region comes from renewable sources. As a result, a large amount of money has been poured in the development of infrastructure and technologies to turn the power of wind, rivers and the sun into usable energy.

According to the United Nations, investments in renewable energies reached a record $211 billion (£143 billion) around the world in 2010 - more than six times as much as in 2004. It is only reasonable that many investors suggest there is an opportunity to make gains from buying securities issued by companies in the sector.

But the reality has proven quite different from theory. Although renewable energies have grown as an industry, it is not one where companies have found it easy to deliver value for shareholders. (News analysis continues below)

The technology to generate and especially store energy produced from sources like the wind and the sun still needs work, and, although costs have come down in recent years, firms still struggle to sell the energy produced at competitive prices. As a result, the industry still depends on official help, such as subsidies in Europe and tax credits in America.

So companies specialising in renewable energies have had a difficult time. “If you are a user of the technology, you should be delighted as costs have fallen so much in the past decade,” says Andrew Pidden, head of the group managing the DWS Invest Clean Tech fund. But he notes that price reductions have not been accompanied by equivalent increases of consumption, which has put the industry under pressure.

“Renewable companies had to keep raising capital and investing in more efficient production plants, which has been a struggle in this financial environment. For investors it has been really hard too, as the values of companies have been falling aggressively,” Pidden says.

For some time investments have been supported by governments, especially in Europe. But help for private companies is becoming increasingly difficult to justify in a climate of austerity. Spain, for example, which has been enthusiastic about using its abundant solar and wind resources to reduce its dependence on imported energy, have slashed subsidies dramatically in an effort to control costs. Italy, which has subsidised, with some degree of success, the adoption of solar energy by households, also faces tough times ahead that will make it difficult to keep the money flowing.

In America, support for clean energy is much less widespread than in Europe, and the tide could turn against the industry if a Republican candidate beats Barack Obama in November’s election. For instance, Mitt Rooney, the leading Republican contestant, has described renewables as an uncompetitive sector that only benefits “companies reaping profits from taxpayer subsidies.”

And all around the world, fossil fuel producers have been pushing the point that oil, coal and gas provide cheaper choices to help businesses to create much needed jobs in hard times. “It is hard to have any certainty on where the industry will go from a policy perspective,” Pidden points out.

The changing fortunes of some companies in the sector have been well documented. In January, Vestas, a Danish producer of wind turbines, announced it was going to dismiss more than 2,300 employees in an effort to cut costs and reverse the deterioration of earnings it saw in 2011.

Two German solar energy companies, Solon and Sollar Millennium, were declared bankrupt last December, only a few months after Solyndra, a California firm that had been cherry-picked by president Barack Obama as a leader for the green economy, had done the same.

According to a keenly watched index (see bar chart), clean energy stocks fell by 38% in 2011, and more than 70% since they peaked in November 2007.

But Pidden says that the situation is getting better as the rate of growth in renewable energy infrastructure has abated a little. That means that the gap between the increase of production and consumption could narrow. Rates should then stop falling, which would improve the prospects of the industry.

In fact, the sector started the year in recovery mode, with stocks going up by almost 8% until January 18. “We have seen something of a bounce already this year in equity prices of renewable energy companies,” Pidden says. “But there is an enormous amount of value that can still be found in the sector.”

Even though the developed world may restrain their enthusiasm for clean energy in the short term, emerging economies, such as China and Brazil, continue to invest heavily in renewable sources as they strive to meet their enormous energy demands. The challenge for windy Scotland is to convince investors that they are also on the right track for sustainable and affordable green energy sources.